The headquarters of Netflix is shown in Los Gatos, California September 20, 2011. Netflix said on Sept. 18 it would separate its streaming video service from the DVD rental busines.

Credit: Reuters/Robert Galbraith

Stocks

(Reuters) - Netflix Inc adopted a poison pill defense to prevent a hostile takeover, acting just days after activist investor Carl Icahn disclosed he had bought a stake in the streaming video and DVD-by-mail subscription service.

The move is meant to prevent an outsider who lacks Netflix board approval from accumulating a stake of 10 percent or more, the company said in a statement on Monday. The measure, approved by the board on Friday, remains in effect for three years.

On Wednesday, Icahn disclosed that he had amassed control of 9.98 percent of Netflix shares. Most of his purchases were in the form of call options that expire in September 2014. The billionaire, who is known for shaking up management, said he believed Netflix was undervalued and an attractive acquisition target for a number of companies.

The poison pill is a common strategy used by companies in response to Icahn.

In a regulatory filing on Monday, Icahn said the Netflix move was "an example of poor corporate governance."

"The pill Netflix just adopted is particularly troubling due to its remarkably low and discriminatory 10 percent threshold," the filing said.

Icahn also said Netflix was one of the few companies that was ignoring shareholder wishes to "de-stagger its board."

Netflix shareholders elect roughly one-third of the company's seven-person board every year. A Netflix spokesman said the board continuously reviews its governance structure.

The video rental company said the poison pill defense is "intended to protect Netflix and its stockholders from efforts to obtain control of Netflix that the Board of Directors determines are not in the best interests of Netflix and its stockholders."

The plan is not meant to interfere with any merger, tender or exchange offer, or other business combination approved by the board, it added.

Netflix has been the occasional subject of acquisition speculation, with Microsoft Corp and Amazon.com Inc among the names that have surfaced. The company boasts 30 million subscribers around the world, though it faces challenges including rising content costs and a costly overseas expansion.

"I don't think the presence of Icahn will help the company get acquired," said Michael Corty, an analyst with Morningstar. Corty noted that potential buyers such as Amazon are building out their own streaming video offerings.

Brett Harriss, an analyst with Gabelli & Co, said he disagreed with the Netflix response to Icahn. "We don't support poison pills. They serve to entrench management and the board of directors to the expense of shareholders," Harriss said. "It's frustrating to see the board of directors respond this way."

Netflix was a Wall Street darling with red-hot growth that boosted shares as high as $304 in July 2011. Many investors soured on the company after it imposed an unpopular price rise in the face of new competition, and increased spending on content and an international expansion.

The company is trying to build its U.S. customer base and use profit there to fund moves into more countries. CEO Reed Hastings argues it is worth the investment to enter foreign markets ahead of rivals. The company projects a fourth-quarter loss due to start-up costs in four Nordic countries.

Under the plan, Netflix is issuing one right for each current share to common stockholders at the close of business on November 2. If the provision is triggered, each right will allow stockholders to buy one one-thousandth of a share of a new series of participating preferred stock at an exercise price of $350 per right.

That gives shareholders the right to flood the market with shares and make a takeover more expensive.

Netflix shares were up 1.4 percent at $77.99 on Monday afternoon.

(Reporting by Lisa Richwine in Los Angeles, Jennifer Saba in New York and Sruthi Ramakrishnan in Bangalore; editing by Saumyadeb Chakrabarty, Lisa Von Ahn, Andrew Hay and Matthew Lewis)